Indeck Maine Energy, L.L.C.
Financial Statements
December 31, 2002, 2001 and 2000
Report of Independent Accountants
To the Members of
Indeck Maine Energy, L.C.C.:
In our opinion, the accompanying balance sheets and the related statements of
operations, changes in members' deficit and of cash flows present fairly, in all
material respects, the financial position of Indeck Maine Energy, L.L.C. (the
"Company") at December 31, 2002 and 2001, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
2002, in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 4 to the financial statements, the Company has temporarily
suspended operations and is dependent on the continuing financial support of the
Members.
PricewaterhouseCoopers LLP
Florham Park, NJ
April 3, 2003
Indeck Maine Energy, L.L.C.
Balance Sheets
- --------------------------------------------------------------------------------
December 31,
----------------------------
2002 2001
------------ ------------
Assets:
Cash and cash equivalents ................. $ 6,270 $ 69,798
Accounts receivable ....................... 488,542 606,089
Inventories ............................... 693,733 480,422
Prepaid expenses .......................... 28,581 5,701
------------ ------------
Total current assets ................... 1,217,126 1,162,010
------------ ------------
Property, plant and equipment:
Land ................................... 158,000 158,000
Power generation facilities ............ 4,240,041 3,795,639
Equipment and other .................... 98,438 60,009
------------ ------------
4,496,479 4,013,648
Accumulated depreciation ............... (1,033,427) (800,108)
------------ ------------
3,463,052 3,213,540
------------ ------------
Intangible assets ......................... 206,577 206,577
Accumulated amortization .................. (71,467) (60,322)
------------ ------------
135,110 146,255
------------ ------------
Total assets ......................... $ 4,815,288 $ 4,521,805
------------ ------------
Liabilities and Members' Deficit:
Liabilities:
Accounts payable and accrued expenses ..... $ 290,785 $ 477,182
Due to affiliates ......................... 2,794,877 1,244,003
Management fee payable .................... 400,000 300,000
Notes payable to members .................. 7,101,000 5,801,000
------------ ------------
Total current liabilities ............ 10,586,662 7,822,185
Commitments and contingencies ............. -- --
Total members' deficit .................... (5,771,374) (3,300,380)
------------ ------------
Total liabilities and members' deficit $ 4,815,288 $ 4,521,805
------------ ------------
See accompanying notes to the financial statements
Indeck Maine Energy, L.L.C.
Statements of Operations
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For the year ended December 31,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
Power generation revenue .. $ 5,237,947 $ 5,587,507 $ 2,017,481
Renewable attribute revenue 2,008,488 -- --
----------- ----------- -----------
Total revenue ......... 7,246,435 5,587,507 2,017,481
Cost of sales, including
depreciation and
amortization of $244,464,
$206,032 and $184,771 in
2002, 2001 and 2000 ...... 9,080,905 6,913,336 2,646,770
----------- ----------- -----------
Gross loss ................ (1,834,470) (1,325,829) (629,289)
General and administrative
expenses ................. 299,746 300,112 478,696
----------- ----------- -----------
Loss from operations ... (2,134,216) (1,625,941) (1,107,985)
Interest income ........... 3,434 11,657 11,857
Interest expense .......... (340,212) (269,216) (183,841)
----------- ----------- -----------
Net loss ............... $(2,470,994) $(1,883,500) $(1,279,969)
----------- ----------- -----------
See accompanying notes to the financial statements.
Indeck Maine Energy, L.L.C.
Statements of Changes in Members' Deficit
For the Years Ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
Indeck
Energy Ridgewood
Services Maine, LLC Total
------- ------------ ----------
Members' deficit, January 1, 2000 . $ -- $ (136,911) $ (136,911)
Net loss .......................... -- (1,279,969) (1,279,969)
------- ----------- -----------
Members' deficit, December 31, 2000 -- (1,416,880) (1,416,880)
Net loss .......................... -- (1,883,500) (1,883,500)
------- ----------- -----------
Members' deficit, December 31, 2001 -- (3,300,380) (3,300,380)
Net loss .......................... -- (2,470,994) (2,470,994)
------- ----------- -----------
Members' deficit, December 31, 2002 $ -- $(5,771,374) $(5,771,374)
------- ----------- -----------
See accompanying notes to the financial statements.
Indeck Maine Energy, L.L.C.
Statements of Cash Flows
- --------------------------------------------------------------------------------
For the year ended December 31,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
Cash flows from operating
activities:
Net loss ....................... $(2,470,994) $(1,883,500) $(1,279,969)
----------- ----------- -----------
Adjustments to reconcile net
loss to net cash flows
used in operating activities
Depreciation and amortization 244,464 206,032 184,771
Changes in assets and
liabilities:
Decrease (increase) in
accounts receivable ...... 117,547 (458,177) 126,450
(Increase) decrease in
inventories ............. (213,311) (336,127) 903
(Increase) decrease in
prepaid expenses ........ (22,880) 129,916 (108,353)
(Decrease) increase in
accounts payable and
accrued expenses ........ (186,397) 189,802 (182,526)
Increase (decrease) in due
to/from affiliates, net .. 1,550,874 827,582 (8,185)
Increase in management
fee payable .............. 100,000 100,000 100,000
----------- ----------- -----------
Total adjustments ........... 1,590,297 659,028 113,060
----------- ----------- -----------
Net cash used in operating
activities ................. (880,697) (1,224,472) (1,166,909)
----------- ----------- -----------
Cash flows from investing
activities:
Capital expenditures ............. (482,831) (395,263) --
----------- ----------- -----------
Net cash used in investing
activities .................. (482,831) (395,263) --
Cash flows from financing
activities:
Issuance of notes payable ...... 1,300,000 1,000,000 1,200,000
----------- ----------- -----------
Net cash provided by
financing activities ....... 1,300,000 1,000,000 1,200,000
----------- ----------- -----------
Net (decrease) increase in cash
and cash equivalents ........... (63,528) (619,735) 33,091
Cash and cash equivalents,
beginning of year ............... 69,798 689,533 656,442
----------- ----------- -----------
Cash and cash equivalents,
end of year ..................... $ 6,270 $ 69,798 $ 689,533
----------- ----------- -----------
See accompanying notes to the financial statements.
Indeck Maine Energy, L.L.C.
Notes to Financial Statements
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1. Description of Business
Indeck Maine Energy, L.L.C. (the "Company") is a limited liability company
formed on April 1, 1997 by Indeck Energy Services, Inc. ("IES") for the purpose
of acquiring, operating and managing two 24.5 megawatt wood-fired electric
generation facilities (the "Facilities") located in Maine. The Facilities
commenced operations on June 10, 1997. On June 11, 1997, Ridgewood Maine, LLC
("Ridgewood"), which is owned equally by Ridgewood Electric Power Trust IV and
Ridgewood Electric Power Trust V, purchased a 50% membership interest in the
Company from IES for $14,000,000. Of this purchase price, $4,857,015 was
contributed to the Company and the remainder was retained by the other members.
a. Ridgewood's Priority Return from Operations: Ridgewood's Priority Return
From Operations is an amount equal to 18% per annum of $14 million,
increased by the amount of any additional contribution made by Ridgewood
and reduced by the amount of distributions to Ridgewood of Net Cash Flow
From Capital Events, as defined.
b. Allocation of Profits and Losses: In accordance with the Operating
Agreement, profits and losses, as defined, are allocated as follows:
First, profits shall be allocated to each member, other than Ridgewood, until
the cumulative amount of profits allocated is equal to the amount of
distributions made or to be made to each member pursuant to the distributions
provisions of the Operating Agreement.
Second, all remaining profits and losses shall be allocated to Ridgewood. Also,
all depreciation shall be allocated to Ridgewood.
Losses and depreciation allocated to members in accordance with the Operating
Agreement may not exceed the amount that would cause such members to have an
Adjusted Capital account Deficit, as defined, at the end of such year. All
losses and depreciation in excess of this limitation shall be allocated to the
remaining members who will not be subject to this limitation, in proportion to
and to the extent of their positive Capital Account Balances, as defined.
Also, if in any fiscal year a member unexpectedly receives an adjustment,
allocation or distribution as described in the Operating Agreement, and such
allocation or distribution causes or increases an Adjusted Capital Account
Deficit for such fiscal year, such member shall be allocated items of income and
gain in an amount and manner sufficient to eliminate such Adjusted Capital
Account Deficit as quickly as possible.
c. Distributions of Net Cash Flows From Operations: For each Fiscal year, the
Company shall distribute Net Cash Flow From Operations, as defined, to the
members as follows:
First, the Company shall distribute to Ridgewood 100% of Net Cash Flow From
Operations until Ridgewood has received the full amount of any unpaid portion of
Ridgewood's Priority Return From Operations, as defined, for any preceding
fiscal year,
Second, the Company shall distribute to Ridgewood 100% of Net Cash Flow From
Operations until Ridgewood has received Ridgewood's Priority Return From
Operations for the current fiscal year.
Third, the Company shall distribute 100% of Net Cash Flow From Operations to the
members, other than Ridgewood, in accordance with the respective interests of
such members until such members have collectively received an amount equal to
the amount distributed to Ridgewood during the current fiscal year.
Fourth, the Company shall thereafter distribute any remaining balance of Net
Cash Flow From Operations 25% to Ridgewood and 75% to the remaining members, in
accordance with the respective interest of such members, until such time as
Ridgewood has received aggregate distributions equal to Ridgewood's Initial
Capital Contribution, as defined. At such time, the distribution percentages
shall be amended to 50% Ridgewood and 50% to the remaining members.
d. Distributions of Net Cash Flow From Capital Events: The Company shall
distribute Net Cash Flow From Capital Events, as defined, 50% to Ridgewood
and 50% to the remaining members, in accordance with the respective
interests of such members. Net Cash Flow from Capital Events is defined as
any cash received from any source other than Net Cash Flow From Operations.
2. Summary of Significant Accounting Policies
Critical accounting policies and estimates
The preparation of financial statements requires the Company to make estimates
and judgements that affect the reported amounts of assets, liabilities, sales
and expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, the Company evaluates its estimates, including bad debts,
recoverable value of fixed assets, intangible assets and recordable liabilities
for litigation and other contingencies. The Company bases its estimates on
historical experience, current and expected conditions and various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgements about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
New Accounting Standards and Disclosures
SFAS 141
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") 141, Business Combinations, which
eliminates the pooling-of-interest method of accounting for business
combinations and requires the use of the purchase method. In addition, SFAS 141
requires the reassessment of intangible assets to determine if they are
appropriately classified either separately or within goodwill. SFAS 141 is
effective for business combinations initiated after June 30, 2001. The Company
adopted SFAS 141 on July 1, 2001, with no material impact on the financial
statements.
SFAS 142
In June 2001, the FASB issued SFAS 142, Goodwill and Other Intangible Assets,
which eliminates the amortization of goodwill and other acquired intangible
assets with indefinite economic useful lives. SFAS 142 requires an annual
impairment test of goodwill and other intangible assets that are not subject to
amortization. The Company adopted SFAS 142 effective January 1, 2002, with no
material impact on the financial statements.
SFAS 143
In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations, on the accounting for obligations associated with the retirement of
long-lived assets. SFAS 143 requires a liability to be recognized in the
financial statements for retirement obligations meeting specific criteria.
Measurement of the initial obligation is to approximate fair value, with an
equivalent amount recorded as an increase in the value of the capitalized asset.
The asset will be depreciated in accordance with normal depreciation policy and
the liability will be adjusted for the time value of money, with a charge to the
income statement, until the obligation is settled. SFAS 143 is effective for
fiscal years beginning after June 15, 2002. The Company will adopt SFAS 143
effective January 1, 2003 and has assessed that this standard will not have a
material impact on the Company.
SFAS 144
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which replaces SFAS 121, Accounting for the
Impairment of Long-lived Assets and for Long-Lived Assets to Be Disposed Of. For
long-lived assets to be held and used, SFAS 144 retains the requirements of SFAS
121 to (a) recognize an impairment loss only if the carrying amount is not
recoverable from undiscounted cash flows and (b) measure an impairment loss as
the difference between the carrying amount and fair value of the asset. For
long-lived assets to be disposed of, SFAS 144 establishes a single accounting
model based on the framework established in SFAS 121. The accounting model for
long-lived assets to be disposed of by sale applies to all long-lived assets,
including discontinued operations and replaces the provisions of APB Opinion No.
30, Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of segments of a business. SFAS 144
also broadens the reporting of discontinued operations. The Company adopted SFAS
144 effective January 1, 2002, with no material impact on the financial
statements.
SFAS 145
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Correction.
SFAS No. 145 eliminates extraordinary accounting treatment for reporting gain or
loss on debt extinguishment, and amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The Company will adopt
SFAS 145 effective January 1, 2003 and has assessed that this standard will not
have a material impact on the Company.
SFAS 146
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146 requires recording costs associated
with exit or disposal activities at their fair values when a liability has been
incurred. The Company will adopt SFAS 146 effective January 1, 2003 and has
assessed that this standard will not have a material impact on the Company.
FIN 45
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees and Indebtedness of Others." FIN 45 elaborates on the
disclosures to be made by the guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also requires that a guarantor recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002; while the provisions of the disclosure
requirements are effective for financial statements of interim or annual reports
ending after December 15, 2002. The Company adopted the disclosure provisions of
FIN 45 during the fourth quarter of 2002 with no material impact to the
financial statements.
Cash and cash equivalents
The Company considers all highly liquid investments with maturities when
purchased of three months or less as cash and cash equivalents.
Revenue recognition
Power generation revenue is recorded in the month of delivery, based on the
estimated volumes sold to customers at rates stipulated in the power sales
contract. Adjustments are made to reflect actual volumes delivered when the
actual volumetric information subsequently becomes available. Billings to
customers for power generation generally occurs during the month following
delivery. Final billings typically do not vary significantly from estimates.
Renewable attribute revenue is derived from the sale of the renewable portfolio
standard attributes ("RPS Attributes"). As discussed in Note 8, qualified
renewable electric generation facilities produce RPS Attributes when they
generate electricity. RPS Attributes have various classes, with each class
assigned a limited life. Renewable attribute revenue is recorded in the month
the attributes are sold at an agreed upon unit price.
Interest income is recorded when earned.
Inventories
Inventories, consisting of wood, are stated at cost, with cost being determined
on the first-in, first-out method.
Impairment of Long-Lived Assets and Intangibles
In accordance with the provisions of SFAS No. 144, the Company evaluates
long-lived assets, such as fixed assets and specifically identifiable
intangibles, when events or changes in circumstances indicate that the carrying
value of such assets may not be recoverable. The determination of whether an
impairment has occurred is made by comparing the carrying value of an asset to
the estimated undiscounted cash flows attributable to that asset. If an
impairment has occurred, the impairment loss recognized is the amount by which
the carrying value exceeds the discounted cash flows attributable to the asset
or the estimated fair value of the asset.
Property, plant and equipment
Property, plant and equipment, consisting of land and machinery and equipment,
are stated at cost. Machinery and equipment, consists principally of electrical
generating equipment. Renewals and betterments that increase the useful lives of
the assets are capitalized. Repair and maintenance expenditures are expensed as
incurred.
Depreciation is recorded using the straight-line method over the estimated
useful life of the assets, ranging from 5 to 20 years with a weighted average of
18 and 19 years at December 31, 2002 and 2001, respectively. For the years ended
December 31, 2002, 2001 and 2000, the Company recorded depreciation expense of
$233,319, $192,750 and $171,489, respectively.
Intangible assets
Intangible assets are amortized over 5 to 20 years on a straight-line basis.
Intangible assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable For the years ended December 31, 2002, 2001 and 2000, the Company
recorded amortization expense of $11,145, $13,282 and $13,282, respectively.
Significant Customers
During 2002, the Company's three largest customers accounted for 67%, 32% and 1%
of total revenues. During 2001, the Company's three largest customers accounted
for 75%, 23% and 2% of total revenues. During 2000, the Company's three largest
customers accounted for 55%, 33% and 12% of total revenues.
Income taxes
No provision is made for income taxes in the accompanying financial statements
as the income or loss of the Company is passed through and included in the tax
returns of the members.
Reclassification
Certain items in previously issued financial statements have been reclassified
for comparative purposes.
3. Notes Payable
Notes payable consist of the following at December 31, 2002 and 2001:
2002 2001
----------- ----------
Note payable to IES (a member),
due on demand with interest
at 5% ............................... $3,550,500 $2,900,500
Note payable to Ridgewood (a member),
due on demand with interest at 5% ... 3,550,500 2,900,500
---------- ----------
$7,101,000 $5,801,000
---------- ----------
4. Operating Status
One project has temporarily suspended its operations. It is management's intent
to restart the Jonesboro plant in the fourth quarter of 2003. Based on forecasts
related to the operation of the Facilities, management believes that the Company
will be able to recover the carrying value of its long-lived assets and meet its
financial obligations. The members intend to continue providing the necessary
financial support to the Company for the foreseeable future and to not demand
payment, within the next twelve months, of the notes payable discussed in Note
3. During the first quarter of 2003, Ridgewood and IES each contributed $600,000
to the Company.
5. Related Party Transactions
The Company is required to pay certain members a fee for management services of
$100,000 per year. Additional management fees of up to $200,000 per year may be
payable contingent upon achieving Ridgewood's Priority Return from Operations,
as defined. No contingent management fee has been accrued as of December 31,
2002 or 2001. Amounts of $400,000 and $300,000 for 2002 and 2001, respectively,
are recorded in management fee payable in the Balance Sheets.
Under an Operating Agreement with Ridgewood Electric Power Trust IV and
Ridgewood Electric Power Trust V ("the Trusts"), Ridgewood Power Management LLC
( "Ridgewood Management"), an entity related to the managing shareholder of the
Trusts through common ownership, provides management, purchasing, engineering,
planning and administrative services to the Company. Ridgewood Management
charges the Company at its cost for these services and for the allocable amount
of certain overhead items. Allocations of costs are on the basis of identifiable
direct costs, time records or in proportion to amounts invested in projects
managed by Ridgewood Management. During the years ended December 31, 2002, 2001
and 2000, Ridgewood Management charged the Company $310,607, $205,120 and
$203,191, respectively, for overhead items allocated in proportion to the amount
invested in projects managed. Ridgewood Management also charged the Company for
all of the remaining direct operating and non-operating expenses incurred during
the periods
At December 31, 2002 and 2001, the Company had outstanding payables and
receivables, with the following affiliates:
As of December 31,
Due From Due To
-------------- ------------------------
2002 2001 2002 2001
---- ----- ---------- -----------
Ridgewood Power Management ...... $ -- $ -- $ 894,057 $ 184,328
Ridgewood Electric Power Trust IV -- -- 238,179 402,436
Ridgewood Electric Power Trust V -- -- 1,187,732 352,436
IES ............................. -- -- 474,909 304,803
From time to time, the Company records short-term payables and receivables from
other affiliates in the ordinary course of business. The amounts payable and
receivable with the other affiliates do not bear interest
6. Fair Value of Financial Instruments
At December 31, 2002 and 2001, the carrying value of the Company's cash and cash
equivalents, accounts receivable and accounts payable and accrued expenses
approximates their fair value. Due to the nature of the Company's relationship
with IES and Ridgewood, the fair value of the notes payable is not determinable.
7. Dispute with ISO
From June through December 1999, the Facilities periodically operated on
dispatch from ISO-New England, Inc. (the "ISO") and also submitted offers to the
ISO to run at high prices during power emergencies. The Facilities have claimed
the ISO owes them approximately $14 million for the electricity products they
provided in those periods and the ISO has claimed that no material revenues at
all are due to the projects. As a result, on October 24, 2000, the Company filed
a complaint against the ISO in the Superior Court of Delaware alleging, among
other things, that the ISO's actions resulted in a breach of an express or
implied contract, violated certain consumer protection laws and amounted to
fraud. The ISO removed the litigation to Federal District Court in Delaware. As
a result of various pre-trial motions filed by the parties, such litigation was
filed as a complaint by the Company before FERC. In April 2002, FERC ruled on
this complaint in favor of the ISO. The Company has determined it will not
appeal nor otherwise contest the ruling by FERC.
8. Approval of Qualification
On May 9, 2002, the Company's West Enfield plant and the Jonesboro plant each
filed an "Application for Statement of Qualification" with the Massachusetts
Division of Energy Resources (the "Division") to qualify as new renewable
electric generation facilities under the Massachusetts Renewable Portfolio
Standard Regulations ("RPS"). Pursuant to these regulations, qualified renewable
electric generation facilities produce renewable portfolio standard attributes
("RPS Attributes") when they generate electricity. RPS Attributes are then sold
to and used by entities that are providing electricity to end-use customers in
Massachusetts. The RPS regulations, and the statute under which they were
promulgated, are intended to spur use and development of new renewable
generation facilities.
On July 8, 2002, the Company received official notice from the Division that the
Application for Statement of Qualification filed pursuant to the Massachusetts
Renewable Energy Portfolio Standard Regulations ("Regulations") by both the
Jonesboro and West Enfield plants had been approved as of July 3, 2002. Pursuant
to such approval, the Division found that the Plants meet the eligibility
requirements of the Regulations and therefore may market and sell renewable
attributes associated with the electric generation of the Plants. Because the
West Enfield plant qualifies under the RPS, pursuant to the power sales
contract, Select Energy paid an additional amount for the RPS Attributes
associated with the electric energy it purchased from the West Enfield plant,
which amounted to approximately $2,008,488 for the year ended December 31, 2002.
9. Subsequent event
On February 13, 2003, the Company sold the RPS Attributes generated from the
power produced in fourth quarter of 2002 for $1,236,720. On behalf of the
Company, Trust IV and Trust V are currently negotiating a transaction with a
power marketer that does business in Massachusetts for the sale of the RPS
Attributes generated by the Company, in the calendar year 2003.